Whole Life Insurance Benefits
Whole life insurance is permanent insurance that remains in effect for the "whole" life of the insured. Along with the death benefit that is paid to the beneficiary, it has a cash value component. A portion of the premium is invested, regardless of whether is it paid in multiple installments or in a single premium. Earnings on the cash account grow tax-deferred for the life of the insured. Whole life insurance benefits include that a policy can be used as an insurance vehicle and an investment vehicle.
The premiums can be much higher than those paid on other types of permanent insurance. However, because the policy remains in force for the entire life of the insured, a policy purchased early in adulthood can be very cost effective.
Choosing the Whole Life Policy with the Best Benefits
Since it is part insurance policy and part investment product, a whole life policy owner must exercise financial discipline in terms of making sure the premiums are paid. Except for a single premium policy, the premiums must be paid when due or the policy will lapse. The policyholder will only retain a limited portion of the cash value if the policy lapses. More important, the death benefit that would have been paid to the beneficiary will be lost. For those seeking a combination life insurance policy and investment product, a whole life policy will provide the following benefits. There are six types of whole life insurance policies to choose from:
Participating Whole Life
This type of whole life insurance policy “participates” in the earnings of the insurance company and pays a dividend. The policy owner can opt to take the dividend as a cash payment, add it to the value of the policy or use it to pay the policy premium. This policy can be a good way to accumulate money for retirement because the earnings grow tax-deferred for as long as the insured pays the premiums. The growth that can be gained happens more quickly because more money is retained within the account to compound over the years.
Non-Participating Whole Life
A dividend is not paid to the owner of a non-participating whole life policy. But the cost of the policy remains fixed for the life of the insured. The premiums are also lower than a participating policy.
Level Premium Whole Life
The premiums are paid in installments and remain the same.
Limited Payment Whole Life
Instead of paying premiums for life, a limited payment whole life policy allows the policyholder to pay the premiums for a set number of years.
Single Premium Whole Life
A single (or lump sum) premium is used to purchase a single premium whole life policy. This type of policy is more frequently used as an investment strategy than for straight life insurance. A single premium policy is sometimes purchased instead of a single premium annuity. One of the best benefits of a single premium policy is that equity is immediate. The policy owner can borrow against it or use it as collateral for a loam immediately.
Intermediate Whole Life
The premium amounts and due dates are flexible.
Whole Life Insurance Level Premium Benefits
Unlike term life insurance policies, whole life insurance policies offer level premiums. In other words, the premiums are the same each year even as the insured ages. What do change over the life of the policy are the amount of money that is applied to the insurance portion of the policy and the amount that is applied to the investment. As the insured gets older, the amount that is applied to the insurance increases because the probability of death increases.
The Benefit of Borrowing Against a Whole Life Insurance Policy
Provided there is enough money in the account, a whole life policy can be borrowed against or used as collateral for almost any type of loan. While each life insurance company will offer different interest rates, restrictions and terms, the availability to access this money can be very helpful in the event the insured loses his or her job or faces some other type of financial emergency. The policyholder can borrow money and can also pay the premiums from the cash account in order to keep the policy in force and protect the death benefit for the beneficiary. Unlike term insurance policies, whole life policies can be surrendered for their cash value. While a policy owner may not receive the entire amount, he or she can still surrender the policy and receive some cash.
Whole life insurance is also popular as a retirement investment because the interest and earnings grow tax deferred until the policyholder surrenders the policy or the beneficiary receives the death benefit. Many people opt to purchase whole life insurance policies as part of an employer sponsored retirement plan. Not only do they get the benefit of insuring their loved families from financial hardship, they also have the added benefit of the safety net of the cash account.
Avoiding Excessive Estate Taxes with Whole Life Insurance Benefits
The earnings on a whole life policy are not currently taxable under federal tax law. Neither are the dividends paid to the insured, provided they are not higher than the premiums that were paid in. Plus, under most circumstances, the death benefit that is paid to the beneficiary is not taxable. But, if the policy owner owns even a part of the whole life policy at the time of his or her dies, his or her portion of the value might be included in the overall estate. This usually triggers both federal and state inheritance taxes.
Whole life insurance investors are always advised to seek the advice of an accountant or other tax professional prior to purchasing whole life insurance for estate planning purposes. In general, however, if the policy is executed properly, the death benefit and cash accounts paid on whole life insurance can avoid excessive estate taxes. If the goal is to leave a beneficiary with as much money as possible, then the policyholder should ensure the contract is executed properly.
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